The Hidden SORP Change That Could Transform Charity Accounts

Why is it relevant?

The new Charities SORP has introduced significant changes in the accounting treatment of leased assets and arrangements where charities receive office space at below-market rates. While the changes may appear abstract as technical accounting, the practical consequences could be significant, particularly for charities that occupy premises free of charge or at below-market rents.

Who does it affect?

Charities with lease arrangements at below-market rates should already have recognised the “gift element” as income and expenditure. However, under the new SORP these arrangements may also give rise to right-of-use assets and lease liabilities. While many charities should already be recognising the donated element within income and expenditure, the new requirements could materially alter reported expenditure patterns and balance sheet values.

In certain circumstances, the resulting increase in recognised assets could be sufficient to affect audit requirements or other reporting obligations. Trustees should therefore begin considering these arrangements well before the year-end reporting process.

What do you need to know?

Free or Below-Market Occupation Arrangements

Many charities operate from premises that are:

• Provided rent-free by a supporter or trustee
• Occupied under a licence at a nominal or peppercorn rent
• Leased from a group entity or connected party at substantially below market rates
• Occupied under long-standing informal arrangements with no written agreement

Historically, many of these arrangements have had limited balance sheet impact. Under the new framework, charities may need to recognise both:

• The economic benefit received through below-market occupation; and
• A right-of-use asset together with a corresponding lease liability

This may create accounting entries far larger than many charities currently expect.

Recognising the Donation Element

Where a charity pays less than market rent, the difference between the contractual rent and the market rental value may represent a donated resource. While this principle is not new, the interaction between donated use of property and the proposed lease accounting requirements may make the accounting consequences more visible and potentially more significant.

For example, if a charity occupies premises with a market rental value of £100,000 per annum but pays only £20,000 per annum, an annual benefit of £80,000 may need to be reflected within the financial statements.

For charities receiving significant property support, the resulting donated income could materially increase reported incoming resources. Whilst there is no movement in cash, reported income may increase significantly, potentially affecting key metrics used by trustees, funders and stakeholders.

Right-of-Use Assets and Lease Liabilities

In addition to recognising donated income, under the new SORP charities will also need to account for occupation arrangements under the lease accounting requirements. This could lead to recognition of:

• A right-of-use asset representing the charity’s right to occupy the premises over the full lease term
• A lease liability reflecting future lease payments
• Subsequent depreciation and finance costs over the lease term

A Particular Concern for London-Based Charities

London-based charities and those operating from high-value commercial property in major cities may be disproportionately affected by the proposed changes. Even where little or no cash rent is paid, the market value of occupation rights could be considerable. Trustees should be aware that what appears to be a modest occupancy arrangement from a cash flow perspective may have a material impact on reported income, assets and liabilities. Early assessment of these arrangements will be essential to avoid unexpected consequences during the year-end reporting and audit process.

The Compliance Consequences

One of the less obvious consequences is the potential impact on audit and reporting requirements. While charities should already be reflecting the donated benefit of below-market occupation where relevant, recognition of significant right-of-use assets could materially increase total assets reported on the balance sheet. In some cases, this may be relevant when considering statutory audit thresholds and other reporting requirements.

Trustees should therefore consider not only the accounting impact of these arrangements but also the potential effect on future governance, reporting and assurance costs. Early planning and robust documentation of key judgements may help avoid unexpected audit delays, increased professional fees and late filing penalties.

Significant Judgements Will Be Required

Perhaps the greatest challenge is that the accounting outcomes may depend heavily on management judgement.

What Is the Market Rent?

Determining market rental value is unlikely to be straightforward. Questions may include:

• Which comparable properties should be used?
• Should charitable use restrictions be considered?
• Is specialist valuation input required?
• How should incentives or rent-free periods be reflected?

Small changes in assumptions could have a significant effect on both donated income and recognised asset values.

What Is the Lease Term?

For many charities there may be no formal agreement in place. If occupation can continue indefinitely, determining the enforceable lease period becomes particularly challenging. Trustees may need to assess:

• Whether either party can terminate the arrangement
• The likelihood of occupation continuing
• Past practice between the parties
• Any implied commitments or expectations

Different assessments could dramatically alter the value of recognised assets and liabilities.

What Discount Rate Should Be Used?

The discount rate applied to future lease payments can have a material impact on the measurement of lease liabilities and right-of-use assets. Determining an appropriate rate may require consideration of:

• The charity’s borrowing profile
• Property-specific factors
• Lease duration
• Available market evidence

This is likely to be a new area of judgement for many finance teams.

Why Early Planning Matters

These judgements can take time to resolve. Valuations may need to be obtained. Lease documentation may need to be reviewed. Trustees may need to formally document assumptions and conclusions. Discussions with auditors or independent examiners may also be required to avoid surprises later in the reporting process. Leaving these issues until the financial statements are being prepared could result in:

• Delays in finalising accounts
• Additional audit work
• Increased professional costs
• Delayed filing with the Charity Commission and Companies House
• Greater regulatory scrutiny where filing deadlines are missed

What should you do next?

Charities should begin by identifying any arrangements where property is:

• Received free of charge
• Occupied at below-market rents
• Provided by trustees, supporters or connected entities
• Occupied without a formal written lease

Trustees can then assess whether specialist valuation advice, legal review of occupancy arrangements, or early discussions with their auditors or independent examiners may be required.

The new SORP has the potential to reshape how many charities report their occupation costs and donated facilities. For some organisations, the financial statement impact may be modest. For others, particularly those benefiting from valuable property support, the effect on reported assets, liabilities and expenditure patterns could be significant.

The key message is simple: understand these arrangements early, document the judgements carefully and engage with advisers before the year-end. Waiting until the preparation of the draft financial statements begins may be too late.

How Blick Rothenberg Can Help

The accounting implications of below-market and donated property arrangements are likely to be one of the more complex aspects of implementing the new Charities SORP. Early assessment can help charities avoid unexpected balance sheet impacts, reporting threshold changes and delays during the audit process.

Contact us

If you would like to discuss how the new requirements may affect your charity, please contact Marc Levy, Partner, Mark Hart, Partner, or Hema Kumari, Manager, from Blick Rothenberg’s specialist charity team using the details below or the form below.

We can help you evaluate existing property arrangements, assess potential accounting impacts, identify significant judgements and prepare for implementation ahead of your next reporting cycle.